What are Health Care Subsidies?

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Since the ACA (Affordable Care Act, also known as Obamacare) was introduced in 2014, there has been a lot of discussion about tax subsidies to help pay health insurance premiums.

Under the ACA those subsidies are two-fold:

Cash subsidies in the form of advance premium tax credits that are applied to premiums due at the time of enrollment. These are based on the estimated income and family size of the applicants. They are reconciled when tax returns are filed.

Enhanced benefits: Applicants that are between 138 and 250% of federal poverty level may actually receive enhanced benefits if they qualify for “enhanced Silver” benefits.

The subsidies that are not discussed are the tax favored nature of employer sponsored benefits, as well as different tax incentives applied to the alphabet soup of tax schemes such as HSA (Health Savings Accounts), FSA (Flexible Spending Accounts), POP (Premium only cafeteria plans) and the like.

When one looks at health care in the US, it’s very important to understand and differentiate between the health care delivery system and the health care financing system. Delivery refers to patient care and direct interaction between patient and provider (doctor, hospital, nurses etc.)

Financing refers to the ways in which we pay for health care. The days of the doctor trading chickens for stopping by the house to treat a family member are long gone. Our payment systems are extraordinarily complex and varied.

In other developed countries there is a basic underlying philosophy or policy surrounding health care and funding schemes are typically consistent with that policy. In the US, we suffer from a type of multiple personality disorder that prohibits us from defining any underlying policy regarding this sector of the economy. As is often the case with this type of disorder chaos follows.

The US allows employers to fully deduct health insurance premiums and the employee is not required to report that benefit as taxable income. This results in a large tax subsidy. One estimate from the CBO (Congressional Budget Office) states that if the deduction for group health insurance was repealed in 2013, the government would have collect $250 Billion in additional tax revenue. Yes, Billion, with a B!

After Medicare and Medicaid, this employer based system is the third largest government health system, according to Joseph Antos of the American Enterprise Institute.

Tax favored savings accounts such as a health savings account (HSA) allow qualified individuals to deduct substantial sums, up to $7900 for contributions to this account. If the funds are used to pay qualified medical expenses, these funds are never taxed for federal purposes, as well as state income tax in some states. (They are not tax favored in California).

FSA (Flexible spending accounts) allow an individual to estimate qualified expenses, set that amount aside in a tax favored account and enjoy a tax free reimbursement of the expenses. Again, these funds are then never taxed, resulting in less money going to the government to fund other programs.

A POP (Premium Only Cafeteria Plan) allows an employee to pay qualified premiums with a pre-tax dollar. Again, another tax subsidy.

Self-employed individuals may deduct their medical insurance premiums, another subsidy.

All individuals may deduct medical expenses that exceed 10% of adjusted gross income, another subsidy.

Clearly our tax policy leads us to believe that we want to incentivize tax payers to have insurance as well as access to other ways to finance health care.

Reviewing these policies and schemes shows a fragmented and staggered approach to designing and implementing these incentives. But make no mistake, they are all tax subsidies. Who benefits depends on the particular plan. Generally, those in the higher tax brackets benefit the most from tax breaks.

The ACA was designed to support the populations making between 138-400% of the Federal Poverty level, because that is where most of the uninsured populations were found. As the ACA is being systematically dismantled, it is incumbent upon the citizens to understand the different ways health care is financed. More importantly they need to understand that the financing system and the delivery system are very different. In the US, they simply are not integrated.

As we discuss those on MediCal or Medicaid, or those that get subsidies under the ACA, we need to understand that there are multiple subsidies. They all just have different labels.

Margaret Beck CLU, ChFC, CEBS started her insurance practice in Redding in 1978. As an insurance broker/consultant, she represents businesses and individuals as their advocate. She assists in choosing proper products, compliance with complex benefit laws and claims issues once coverage is placed. All information in her column is provided to the best of her knowledge, subject to final regulation by the respective agencies.
Questions to be answered in this column can be submitted to info@insuranceredding.com.
Beck's column is also published in the Redding Record Searchlight.

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